First the election, now the EU referendum….
The last couple of months have been somewhat of a roller coaster ride for private equity businesses. First, the uncertainty pre-election, the expectation of a hung parliament with months of wrangling and negotiations. Then, the relief felt when the result was a majority, it almost didn’t matter which party. The Conservative party, though, are generally accepted to be the party of business, supportive of entrepreneurship and private equity which they view as drivers of growth, jobs and wealth creation.
Initial feedback from the market was that the result was likely to galvanise more activity within the market. More deals would be completed, hold times would shorten and confidence would be high.
However, there are a couple of major cautionary points still to consider.
Europe – in or out?
The Queens Speech this week, confirmed that there will be an EU Referendum in the next two years, possibly as early as autumn 2016. Mark Carney, Governor of the Bank of England, is certainly pushing for it to be sooner rather than later in order to avoid a prolonged period of uncertainty.
For private equity, the prospect of a hard-fought, polarising referendum campaign will create a feeling of instability, and makes forecasting more tricky.
Some businesses are stating that we should not fear an exit – Lord Bamford, Chairman of JCB stated ‘We are the fifth or sixth largest economy in the world. WE could exist on our own – peacefully and sensibly’.
However others are understandably less enthusiastic about the idea. Despite the fact that the percentage of UK trade with the EU has fallen slightly, it still accounts for almost 50% of imports and exports. Businesses which have a greater reliance on dealing with the EU will be feeling particularly nervous.
The question facing private equity is whether to sell now, two years or so before the referendum, when uncertainty could affect their ability to achieve a good price, or wait and take an early bet on which way the outcome will go.
Will Capital Gains Tax be used to pay for more austerity?
The other major sticking point for firms is whether the government will raise capital gains tax (CGT), a revenue stream that wasn’t frozen in yesterday’s Queens Speech alongside income tax, VAT and national insurance.
George Osbourne will be looking for other ways to tackle the deficit, and could easily look at CGT as a way of doing this, something that could sting PE firms. Entrepreneurs’ tax reliefs were affected in the last budget, and there is speculation as to whether the rate of CGT, or the system of reliefs will be targeted when Mr Osbourne presents his emergency budget this July.
Has anything actually changed?
Ok, so the political landscape is throwing yet more challenges at private equity, just when it seemed that things may settle down.
But hasn’t it always been that way? Really, what certainties have existed over the past decade?
Private equity firms, and their portfolio companies, will continue to try and ride whatever storm comes their way, and adapt the business model to create advantage. Hold periods and exits may be affected, chance of success will be impacted by external environmental conditions- sometimes positively, others negatively, some sectors faring better than others. But firms will continue to try and extract maximum value, creating jobs and opportunities as they do so.
Arden Tomison, Director
News & Insight